What happens when Capital Flows to Emerging Markets Stop Suddenly?

Posted by David Hunkar on 3 July 2009, 7:41 am

One of the biggest risks of investing in emerging markets is that capital inflows from advanced countries can stop suddenly. This can be due to many reasons such as political problems, higher possibility of higher return in advanced countries, over-heating of the emerging market economies, etc. When capital inflows into emerging markets stop suddenly the real economy of those countries will be affected severely for many years to come.

The following historical charts from a study by authors at IMF shows that once capital inflows stop, real growth trajectory of emerging markets is negatively impacted and it takes many years to recover and follow the normal growth that existed before the crisis.Source: The Transmission of Financial Stress from Advanced to Emerging Economies, IMF Working Paper

Related ETF: iShares MSCI Emerging Markets Index (EEM)

A Look at US Trade with China

Posted by David Hunkar on 2 July 2009, 8:05 pm

The latest trade data shows that US exports to fell slightly in April over March. However imports were up.Imports have picked up since reaching lows in February. The trade deficit with China continues to be still high since the US imports more than four times what it exports to China. US exports to China is down 15.6% year-over-year thru April this year.Though China’s imports are up thru May, it has not turned into higher export opportunities for US companies.

Click to Enlarge

Data Source: Census.gov

From a historical perspective, both imports from China and exports to China from have to rise in sync with each other. If the US exports continues to be flat-to-down and imports from China improves then the trade deficit will grow more and it will also imply that the Chinese are importing goods from other countries or sourcing goods from domestic producers. Given the current state of the US economy and the 9.5% official unemployment rate reached today, the US will import less from China.This may lead to further social unrest in China unless China is able to stimulate domestic consumption.

The World’s Most Profitable Banks in 2008

Posted by David Hunkar on 1 July 2009, 7:23 pm

The following are the 25 most profitable banks in the world based on their 2008 earnings as per The Banker magazine:

[TABLE=167]

Not surprisingly Chinese banks dominates this list with a total of five and three among the top five ranks. ICBC of China ranks the most profitable in the world with a profit of $21.2B. Banco Santander (STD) of Spain came at third with a profit of $15.8B. Among the British banks , Barclays (BCS) and HSBC (HBC) are in this list because they are relatively in better shape than their peers like Llyods (LYG), Royal Bank of Scotland(RBS), etc. Royal Bank of Canada(RY) ranked number ten. Royal Bank is the most profitable of all large Canadian banks and is a long-term consistent performer. Banco Bradesco of Brazil (BBD) made it to this list at number two beating competitor Banco Itau Unibanco (ITUB).Among the big four Australian banks Westpac (WBK) and Commonwealth Bank Group are on this list.Bank of America Corp (BAC) and US Bank (USB) are the only two US banks in the rankings but came in at the bottom of the list mirroring the performance of the housing markets and the U.S. economy in general.

Deleveraging by American Consumers Continues

Posted by David Hunkar on 30 June 2009, 10:22 pm

Consumers in the U.S. started fixing their finances last year. This process has gained momentum in the last quarter and this week we learned that the savings rate reached a high of 6.9%. Americans have been reducing their debt and spending less during the past few quarters.

Household liabilities fell to 131.1 % of disposable income (after-tax income) in the last quarter from a peak of 141.0% in 2007.At the end of 2008, the number stood at 133.9%. In the first quarter consumers paid down debt and did not add new debt to their finances. From the above chart, we can see that liabilities grew form about 87% of after-tax income in 1990 to an all-time high in 2007 due to the availability of cheap credit and excessive borrowing. In this decade household debt-to-income ratio rose considerably faster than previous years.For the first time ever, households debt fell for two quarters in a row for 4Q, 2008 and 1Q,2009.

Since the U.S. economy is a consumer-based economy the fall in debt growth has a negative impact on a any recovery.

A historical chart of the household liabilities is shown below.

Source: BEA,Â Flow of Funds of the United States, Federal Reserve

From the late 80s households continued to accumulate more liabilities up until last year. In Q1,2007Â total household liabilities decreased by $255b compared to taking on about $2.8T debt in Q1,2008. Just like the borrowing binge went on for many years, the deleveraging process will continue for a few years.